Trimming the "Judicial Oak": Rule 10b5-2(b)(1), Confidentiality Agreements, and the Proper Scope of Insider Trading Liability

By Davis, Ryan M. | Vanderbilt Law Review, October 2010 | Go to article overview

Trimming the "Judicial Oak": Rule 10b5-2(b)(1), Confidentiality Agreements, and the Proper Scope of Insider Trading Liability


Davis, Ryan M., Vanderbilt Law Review


I. INTRODUCTION .................................................................. 1470

II. THE MISAPPROPRIATION THEORY: ORIGINS AND DESTINATION ..................................................................... 1472

A. Rule 10b-5 and Its Limitations ............................. 1472

B. The Development of the Classical Insider Trading Doctrine ................................................... 1475

C. Expansion of Insider Trading: Acceptance of the Misappropriation Theory ............................ 1478

D. Rule 10b5-2(b)(l) and Confidentiality Agreements ............................................................. 1483

III. DIFFERING VIEWS OF A "SIMILAR RELATIONSHIP OF TRUST AND CONFIDENCE" AND THE VALIDITY OF RULE 10b5-2(b)(l) ........................................................ 1487

A. Where the Courts Stand on the Issue ..................... 1487

1. Cases Supporting a Broad View of the Duty Requirement ............................ 1487

2. Cases Supporting a Narrow View of the Duty Requirement ............................ 1490

B. Failings of the Broad View: Analysis of Confidentiality Agreements and Rule 10b5-2(b)(l) ................................................... 1493

IV. FILLING THE VOID CREATED AFTER ABANDONING RULE 10b5-2(b)(l) ............................................................ 1499

A. Solution: Insider Trading Liability Should be Based on Fiduciary Duties and Agreements to Refrain from Self-Dealing ........................................................... 1499

B. Liability Should Not be Limited to Those with Fiduciary Duties ........................................... 1504

V. CONCLUSION ...................................................................... 1506

I. INTRODUCTION

In recent years the Securities and Exchange Commission, commonly known as the SEC, has been involved in a number of highprofile suits that have attracted a good deal of media attention. Among those prosecuted by the Commission are hedge fund billionaire and Galleon Group founder Raj Rajaratnam,1 investment/Ponzi - scheme guru Bernie Madoff,2 television host and magazine publisher Martha Stewart,3 and colorful Dallas Mavericks owner Mark Cuban.4 Although such notable suits may simply be the SECs attempt to justify its own existence and role in the market it polices in light of the financial disasters of the past decade, these cases do raise some significant questions regarding the amount of power delegated to the Commission by Congress.5 Specifically, what exactly is the scope of the SECs authority, and is there any limit on its ability to prosecute some of the most powerful and prominent people in the country?

While the SEC seems to be engaged in some muscle-flexing with regard to whom it chooses to prosecute, the Commission has also attempted to broaden the scope of its statutory power, especially with regard to the doctrine of insider trading.6 Rule 10b-5 - the provision utilized to prosecute inside traders - has experienced expansive growth since its creation, developing from a mere statutory catchall provision in the securities laws to one of the SECs chief weapons in combating insider trading and other fraudulent actions in the securities markets.7 In fact, the liberal expansion of Rule 10b-5 from its humble beginnings has been so vast that it led Chief Justice Rehnquist to remark that the Rule is "a judicial oak which has grown from little more than a legislative acorn."8

Despite the significant growth that Rule 10b- 5 has undergone since its enactment, the Supreme Court has always carefully limited the Rule to its statutory roots of prohibiting deceptive and manipulative conduct in the securities markets.9 Traditionally, to be liable for insider trading, the trader had to owe a fiduciary duty to the counterparty to the trade, or have a similar relationship of trust and confidence with him. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Trimming the "Judicial Oak": Rule 10b5-2(b)(1), Confidentiality Agreements, and the Proper Scope of Insider Trading Liability
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.